How long payment terms impact client / agency relationships

This post is by Darren Woolley, Founder of TrinityP3. With his background as analytical scientist and creative problem solver, Darren brings unique insights and learnings to the marketing process. He is considered a global thought leader on agency remuneration, search and selection and relationship optimisation.

This is the seventh in a series of one minute videos that address one of the many complex challenges facing marketing, media and advertising today. The Golden Minute series is an attempt to prove Albert Einstein right when he said “The definition of genius is taking the complex and making it simple”.

But he also said “Everything should be made as simple as possible, but not simpler”. So we will leave it for you to judge. Please let us know here if there is a topic you would like us to cover in a Golden Minute.

Let me be completely up-front here, this is not just an issue for advertising agencies, it is also an issue for consulting companies like mine. There are many major companies who will put you through a detailed and protracted procurement process, negotiate your tendered price down and then inform you that they have payment terms of 90 days or more.

Others are less obnoxious in that they state their payment terms up front, which, depending on the type and size of the project being tendered, allows us the opportunity to politely withdraw from the process. There are plenty of other more reasonable companies willing to pay for our services on 30 days and sometimes less so that we do not need to waste our time on companies who basically expect their smaller vendors and suppliers to act as their source of free cash.

An on-going industry issue

This whole trend became popular during the global recession of 2007 / 2008 as CFOs of large companies realised their small creditors were a potential source of free finance. By simply extending standard payment terms from 30 days to 75, 90 and in a few cases 120 days they effectively achieved free, short term lending at a time when credit was increasingly more expensive to come by.

Mind you, the reasons often given by those left to implement this policy is often quite creative, from the fact that the company accounts department is so under-staffed that it takes 90 days to process the invoice, to the bleeding heart who tried playing for sympathy explaining that as a manufacturing business it can take 2 years from buying materials to recouping revenue from sales, or the finance genius who wondered “why the complaints when interest rates were so low that money is cheap” only to be asked then, if that is the case why was their own company not taking responsibility for their own cashflow issues?

We noted the trend back in 2012 as an increasing number of advertisers raised the issue with us. According to a recent survey by ID Comms in the UK, it does not appear that the situation has improved, if anything it appears to have become worse with more and more advertisers thinking that extended payment terms for their agencies and suppliers is acceptable.

It is interesting this corporate bully behaviour is still so popular and widespread when so many governments around the world have taken action to protect businesses, especially those small-to-medium enterprises who contribute significantly to GDP, by legislating to ban extended payment terms by larger companies in dealing with their smaller suppliers.

The on-going implications

While I am sure the finance people who came up with this idea think it is very clever, we have come across some very creative solutions to the problems they have effectively passed on to their agencies and the marketers within their own organisation.

When confronted by their media agency who explained the issues with payments to media publishers, they allowed the agency to bill an extra two month of media billings up front to act as a float. This means that the agency is not funding the media cost for the 90 days between invoicing the client and payment, but is managing a 2 month float of cash provided by the client up front, effectively negating the purpose of the 90 day payment term.

In tenders we have seen hot independent agencies decline participation in the pitch, because unlike their larger holding company competitors they do not have the scale or financial resources to fund these clients and their unreasonable payment terms, especially when they already have clients willing to pay for their services on more reasonable terms.

A design company that works on a project fee basis simply builds in a 10% margin for each 30 days payment is delayed. Because they are in a niche category and considered desirable by reputation the marketers who engage them are happy to pay the premium even if procurement will attempt to negotiate the price down.

To prove we put our money where our mouth is, in the past 12 months we have turned down five tender opportunities for companies who have payment terms beyond 45 days. In each case we informed them of the reason for our decision. We have tendered for work where payment terms were longer, but only once we looked at the tender process and were assured that the potential reward justified the headaches of funding the client.

We have also stopped working with one client who previously had 90 day payment terms but then inexplicably made us wait more than 180 days for payment through a new series of onerous and time-consuming administration requirements on each job.

The great irony in all this is those same companies will often have you believe they are terrific corporate citizens, when it is well known they are really no more than financial bullies expecting their smaller suppliers to fund their cash flow and profits.

Golden Minute Script

How often do you get paid?

Weekly? Fortnightly? Monthly?

So why do some companies insist on taking two months or more to pay their agencies?

Agencies have cash flow problems too.

Yet many governments, including the EU, have laws governing these unfair payment terms to small to medium companies.

Yet these so call good corporate citizens continue to make their much smaller suppliers wait months for their money.

In the meantime putting their agencies under further financial pressure.

And really if these big corporations are that short of cash perhaps their shareholders should be informed?

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Darren is considered a thought leader on all aspects of marketing management. A Problem Solver, Negotiator, Founder & Global CEO of TrinityP3 - Marketing Management Consultants, founding member of the Marketing FIRST Forum and Author. He is also a Past-Chair of the Australian Marketing Institute, Ex-Medical Scientist and Ex-Creative Director. And in his spare time he sleeps. Darren's Bio Here Email: darren@trinityp3.com